One of the most important decisions when investing is to understand what you’re investing for – your goal. Is it to grow money over the long term for something like a pension, a house, or to pass on to your children? Or are you looking to get an income from your investments? Perhaps it’s a combination of the two?
Answering this question will help you know what to look for when choosing your investments.
Speaking to a financial adviser can help you define your investment goal. There’s more on getting financial advice later in this guide.
Before you invest
Step 1: understanding risk
If you’re new to investing the first thing to do is to familiarise yourself with the basics, particularly with regard to risk.
- Investing in the stock market is risky. When you invest you could lose money.
- You can choose your level of risk by investing in different types of asset – for example, shares or bonds – and different areas of the world.
- Investing gives you a chance to make more profit than you’d get by putting your money in a bank. Savings in a bank often lose value over time due to inflation. However, they are very secure.
- More risky investments should be held for the long term. This gives your investments time to recover if they perform badly. You should plan to invest for 5, 10, or even 20 years, especially if the investment is very high risk.
Step 2: your current situation
Look carefully at your current financial situation. You need to work out how much you can afford to invest. To do this, you will need to consider your:
- Assets: things you own, such as property or stocks.
- Liabilities: debts, such as a business loan or mortgage.
- Income: money from your salary or any other source.
- Expenditure: what it takes to maintain the lifestyle you lead.
A financial adviser can help you work out what you can afford.
Step 3: research
How your investments are split makes a big difference to the performance of your portfolio.
To make informed choices, you need to understand how different investments are performing now and what the outlook is. You could research types of assets (equities, bonds, cash, property, money markets etc.) and markets around the world (such as the UK, North America and Asia).
It's a good idea to:
- Read a variety of financial publications, newspapers and websites..
- Get a feeling for investment choices, strengths and weaknesses of different sectors and the performance of the markets.
- Look at what different experts advise and how opinions differ.
- For more information on research, see Useful links.
Tips for investment planning
- Don’t risk going further into debt.
- If you’re in debt, think carefully before you make a risky investment in stocks or shares. You might find it wiser to pay off the debt first. Remember, high-risk investment is not suitable as a way to get out of debt.
- Before you invest, make sure you have some "rainy day" money. Keep a secure cash fund in a bank or building society you can access quickly for any unexpected outgoings or emergencies.
- All investments involve risks. To be truly comfortable investing you should be able to survive any losses. You're after a profit, obviously, but your finances shouldn't be crippled if you make a loss. This is closely linked to your timeframe for investing. How long can you afford to have your money committed to an investment?